US President Donald Trump described his Argentinian counterpart, Javier Milei, as a “truly fantastic and powerful leader” following a meeting on Tuesday last week on the sidelines of the UN General Assembly (UNGA) in New York.
He stated to the media, “I’m doing something I don’t usually do… I’m giving him my full support.” US Treasury Secretary Scott Bessent stated the following day that he and President Milei were “working in close coordination” and would “do what is necessary” to help Argentina’s economy.
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Argentine bond prices sharply dropped last week as investors watched the country’s central bank quickly burn through its sparse foreign currency reserves to protect the declining peso. Bessent’s pledge came as a result of that decision.
The government had to sell more dollars on the spot market to bolster its recovery on Tuesday this week, which was its biggest drop in a single day since September 8, forcing it to sell even more.
Milei, a maverick outsider, promised to tame runaway inflation and promote stability in her surprise election victory in 2023. Milei has previously been referred to as his “favorite president” by Trump, a libertarian ally.
Can Trump and his administration, however, save Argentina’s economy? And how are they undertaking this task?
What economic interventions has Milei made?
Argentine voters elected Milei as their president in November 2023 after years of financial crisis dissatisfaction. The far-right libertarian promised a dose of agonizing shock therapy by cutting back on state funding to combat fiscal imbalances and tame inflation.
Years of economic frustration contributed to Milei’s electoral success. The economy was on the verge of recession, with four out of ten Argentinians still living in poverty when he was elected. Voters’ primary concern was inflation, which was in triple digits.
Milei cut public payrolls, reduced fuel subsidies, and reduced the number of government ministries by half in his first few weeks in office. The pressure on Argentina’s central bank to print money to cover spending, which was in turn causing inflation, decreased as monthly deficits decreased.
The result was a drop in headline inflation from Milei’s first year in charge to 37% last month. However, higher interest rates (as determined by the central bank) and other growth-zapping policies that aimed to lower inflation caused the economy to stall.
According to pollster Trespuntozero, the president’s approval ratings have fallen from 48% in July to 41% in the middle of September, despite stagnating wages and rising unemployment.
Milei has also experienced a number of political setbacks, including a disputed victory in provincial elections, a corruption scandal involving medical contracts signed by his sister, and a congressional defeat that overturned his vetoes in order to restore funding for education and health.
What causes the Argentine peso to suffer?
The peso has been floating in an exchange-rate band since April, when the International Monetary Fund (IMF) launched its 23rd program in Argentina. This places a cap on how much it can rise or fall against the US dollar.
However, currency traders started selling the peso because they were concerned that recent setbacks would put an end to Milei’s enduring support.
By mid-September, the official rate of the peso had dropped by almost 10% and begun to test the exchange-rate band’s upper bounds. On September 17, it briefly overtook the upper limit, reaching 1,475 to the dollar.
The Argentine central bank had spent $1 billion of its foreign exchange reserves, which are used to maintain currency stability, to keep the peso below the currency cap on September 19. Inflation may start to rise once more if it does.
In the first half of 2026, Argentina will need to find $ 10 billion to pay off its debt to the IMF. Simply put, the bank lacks the resources necessary to sustain its long-term peso support. US assistance comes in at this point.
What is Washington’s proposal?
Bessent, the US’s secretary of state, has promised a “large” intervention to stabilize Argentina’s deteriorating currency. His initial announcement on Wednesday initially sparked a little sluggishness in financial markets.
In addition to approving a $ 20 billion credit line or loan, the US Treasury is considering purchasing Argentine government bonds. According to Bessent, other ways to support Buenos Aires include purchasing dollar-denominated debt and performing currency swaps.
Before the midterm elections in October, Milei will have some breathing room.
Milei thanked Trump and Bessent for their “unconditional support” in a post on X. Milei remarked, “Those of us who support the freedom of thought must work together for the well-being of our people.”
Trump’s steep tariffs on Brazil, whose president, Luiz Inácio Lula da Silva, is a left-wing leader, are stark contrasts with his throwing his weight behind Argentina’s troubled leader.
What was the news’s impact on the markets?
Financial markets were initially boosted by Bessent’s comments on Wednesday, the day after Trump met with Milei. Argentina’s bonds due in 2029 increased in value by 6 cents to reach 71 cents per dollar. In other markets, local stock markets rallied, and the peso increased by about 4%.
Pantheon Macroeconomics’ chief Latin American economist, Andres Abadia, claims that Bessent’s comments “promoted a general improvement in the country’s financial indicators.” In Argentina, the news received favorable reviews.
Abadia claimed that the action “adjusted the central bank’s international reserve position, giving it more room to maneuver in foreign exchange markets.”
He claimed that it has also lessened Argentina’s risk of default, which has lowered financial considerations.
However, the peso dropped by 6% during the day on Tuesday this week, fueled by growing political and economic uncertainty, after a week of relative stability. The government intervened by selling off US dollar reserves, which resulted in a dollar-for-dollar decline of 1.4 percent, or 1,380 pesos per dollar.
Can Trump’s administration, therefore, save Argentina’s economy?
Under Trump’s leadership, it would be the second significant bailout for Argentina. In a later agreement that later brokered, he pushed the IMF to approve a $50 billion loan for Mauricio Macri, the president’s ally at the time.
The government was expected to force the peso to fall, and the likelihood was growing at the start of this month. However, according to experts, the prospect of US assistance appears to be merely a delay in devaluation until after the midterm elections. Bessent even referred to the aid as a “bridge to the election.”
Milei will be aiming for a higher voter turnout in Congress on October 26. Many people believe that the exchange-rate system will be forced to change to make the peso more freely even if he retains his Libertad Levanza Party seats.
US financial support has “bought some time for Milei,” according to Abadia. Not a panacea, but a lifeline. Inflation risks are on the rise in the near-term, he added, and if Milei performs poorly in October, the negative political and financial noise would return.
